QUESTION 4 [25 MARKS]

The following budgeted profit statement has been prepared using absorption costing principles.

January to June 2017 July to December 2017

BWP'000 BWP'000 BWP'000 BWP'000

Sales 540 360

Opening inventory 100

Production costs: 160

Direct materials 108 36

Direct labour 162 54

Overhead 90 30

460 280

Closing Inventory 160 300 80 200

Gross profit 240 160

Production overhead:

(Over)/under absorption (12)

Selling costs 50 12

Distribution costs 45 50

Administration costs 80 40

80

Net profit 163 182

77 (22)

Sales units

Production units 15000 10000

18000 6000

The members of the management team are concerned by the significant change in profitability between the two six-months periods. As a management accountant, you have analysed the data upon which the above budget statement has been produced, with the following results.

• The production overhead cost comprises both a fixed and a variable element. The latter appears to be dependent on the number of units produced. The fixed element of the cost is expected to be incurred at a constant rate throughout the year.
• The selling costs are fixed.
• The distribution cost comprises both fixed and variable elements. The latter appears to be dependent on the number of units sold. The fixed element of the sot is expected to be incurred at a constant rate throughout the year.
• The administration costs are fixed.

Required:

Present the above budgeted profit statement in marginal costing format. (25 marks)